The Canada Pension Plan (CPP) is a social insurance plan funded by contributions from employers, employees, self-employed people, and the revenue earned on CPP investments. It provides income replacement to contributors and their families in the event of retirement, disability or death. It is a statutory program governed by the federal government and the provinces. It is the 7th largest pension fund in the world.
Eligibility
In order to qualify you must:
- Be at least 60 years old
- Have made at least one valid contribution to the CPP
Contributions
Every person who is older than 18 and works in Canada outside of Quebec (Quebec has a separate pension plan, the Quebec Pension Plan) and earns more than $3,500, must contribute to the pension plan. Contributions are deducted from earnings and a portion is paid by employers. Self employed individuals are responsible for the full amount. Contributions are made on earnings up to a maximum amount know as the Yearly Maximum Pensionable Earnings (YMPE) which is $66,000 and increases with the Consumer Price Index. There are enhancements to CPP which will be phased in through 2025. You can learn more below.
Payments
The average monthly amount paid for a new retirement pension at age 65 in January 2023 was $811.21 while the maximum monthly amount you could receive at age 65 is $1,306.57 in 2023. The amount is influenced by the age you start to receive your pension, how much and how long you contributed to the CPP, and your average earnings throughout your working life.
Sustainability
As of December 31st, 2022 the Canada Pension Plan has assets of $536 billion. Every 3 years the Chief Actuary issues report that reviews the financial state and sustainability of CPP. The most recent report completed in 2019 found that the Canadian Pension Plan was sustainable over a 75-year period.
History of CPP
The Canada Pension Plan was enacted in April 1965. It was created combat the poverty experienced by seniors in Canada. In 1961, the poverty rate among households headed by a senior was 43.9% and the average retirement age was 67.5 with a life expectancy for males of 68.8 at the time.
The intention was to replace 25% of a worker’s average lifetime earnings up to a defined limit. Contributions to CPP began on January 1, 1966 and the benefits became payable in 1967. Contributions were originally set at 1.8% of annual employment earnings for both employers and employees.
Changes to CPP
There have been 2 major reforms to CPP. In 1997, contribution rates were doubled to 9.9% of pay to keep the plan sustainable as Canada’s population aged and its workforce declined relative to the number of retirees. The second set of major reforms were enacted in 2016 and will be phased in through 2025. These reforms will enhance CPP benefits to eventually cover 33.3% of average lifetime earnings. They will also increase the ceiling on earnings covered by 14%. The enhancements will increase the combined contributions of employers and employees by 2% on amounts below the Yearly Maximum Pensionable Earnings (YMPE) amount and by 8% on the amount above he YMPE.
Some other notable changes to CPP through the years:
- Automatic indexing of pensions to changes in the Consumer Price Index were adopted in 1974
- Ability to receive CPP at age 60 at a reduced amount introduced in 1987
When Should I Start Taking CPP?
The answer to this question is different for everyone. However, longevity risk (the risk that you will outlive your resources) is the biggest risk we face. If that was your only consideration, the answer would always be to delay it as long as you can. Your CPP payment is reduced by 0.6% for every month prior to your 65th birthday you elect to receive it and is increased 0.7% for every month after your 65th birthday you delay your payment up to age 70. Having a larger reliable (nothing is guaranteed) payment until you pass away is going to benefit you more the longer you live.
If you are dependent on your payments, expect to live a shorter life, prioritize the value of your estate, believe CPP will be reduced in the future, or simply have a preference for receiving it sooner; it may be better to start your payments earlier.
There are many considerations unique to you when determining when to start CPP. It is helpful to evaluate a variety of scenarios to optimize your decision. If you would like to evaluate your retirement plan, including when might be the optimal time to start taking CPP, feel free to schedule a no obligation Zoom call with me.
Bobby McBride holds the Certified Financial Planner (CFP) designation and is Financial Planner at Planning with Bobby Inc. He also holds the Chartered Financial Analyst (CFA) designation and is an Investment Advisor at Investing with Bobby of Designed Securities Ltd.
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